FIRST RESOURCES LIMITED (SGX:EB5)
BUMITAMA AGRI LTD. (SGX:P8Z)
Regional Plantation - We Are Turning More NEUTRAL; Time To Take Some Profit
- We downgrade our sector call to NEUTRAL (from POSITIVE) given limited upside to our target prices following recent share price outperformance. However, a protracted Russian-Ukraine war into the spring planting season and/or any agri-related sanctions on Russia or by Russia may just keep CPO (crude palm oil) average selling price lofty for a bit longer. Else, we believe CPO average selling price may likely peak in 1Q22 as palm oil supply is expected to recover from 2Q22 and Indonesia will gradually lift export restriction post Lebaran.
- We downgrade Genting Plantations, Sarawak Oil Palms, TSH Resources, and Boustead Plantations to HOLD (from BUY) and cut First Resources (SGX:EB5) to SELL (from HOLD).
- We upgrade Ta Ann to BUY (from HOLD). Our BUYs are KL Kepong, Ta Ann and Bumitama Agri (SGX:P8Z).
1-month Future CPO price has likely peaked at MYR8,163/t
- A confluence of factors formed the perfect storm to lift 1-month futures CPO to as high as MYR8,163/t on 1 Mar (Year-to-date: MYR5,941/t). These factors included
- tight CPO supply as output fell short of market expectations in 4Q21 and the industry is now in seasonal low crop season;
- deteriorated South American crop prospects due to La Nina development last 3 months;
- spike in crude oil prices due to geopolitical tensions;
- disrupted sunflower oil exports from the Black sea region due to Russia-Ukraine war;
- high fertilizer prices; and
- Indonesia’s sudden restriction on palm oil exports (since 27 Jan) to ensure sufficiency of cooking oil in the domestic market disrupted exports as Indonesia exporters need to show proof they allocated 20% of export volumes to meet domestic market obligation before being granted corresponding export permits.
The perfect storm will soon pass?
- Most of the above factors will soon pass. La Nina is forecasted to end over the next three months. Most international climate models surveyed by Australia Bureau of Meteorology expect a return to neutral El Niño-Southern Oscillation (ENSO) condition soon. The world has had two consecutive years of La Nina which impacted oilseed crop prospects that led to tightening supplies. While parts of the world suffered pockets of dryness, La Nina brought ample rainfall to Malaysia and Indonesia. This provided conducive environment for palm oil crop recovery in 2022.
- Still, sufficient fertilizer will need to be administered in 1H22 to support optimal output recovery in 2H22.
- In terms of cropping pattern, we believe palm oil output is poised to pick up seasonally from 2Q22 and hit a seasonal peak in 2H22. A timely return of foreign labourers to Malaysia, targeted by end-2Q22, will coincide with the onset of peak harvesting season in 2H22. As for Indonesia’s export restrictions, we believe it will ease post Lebaran or even earlier, as long as the government is satisfied there is sufficient domestic cooking oil.
Russian-Ukraine war remains the wild card
- A protracted Russian-Ukraine war is our key concern. With each passing day, there is heightened risk of greater sanctions on Russia or by Russians on the rest of the world (in retaliation). Russia and Ukraine account for 75% of global exports of sunflower oils in 2021 marketing year (i.e. 8.5mt or 8.9% of global 17 oils & fats exports). A prolong war may also risk Ukraine farmers missing out on sunflower planting this late-spring.
- In addition, Russia is also a key potash and nitrogen fertilizer exporter globally, accounting for more than 12% of global trades. A quick end to Russian-Ukraine war will help restore normalcy again.
Ong Chee Ting CA
Maybank Research
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https://www.maybank-ke.com.sg/
2022-03-08
SGX Stock
Analyst Report
1.880
SAME
1.880
0.98
UP
0.930
